Fitch Affirms Monongalia Health System's (Morgantown, WV) Revs at 'A-'; Outlook Stable
Fitch Ratings has affirmed its 'A-' rating on the following series of bonds issued on behalf of Monongalia Health System, WV (Mon Health):
--$21.1 million Monongalia County Building Commission series 2011
--$34.5 Monongalia County Building Commission series 2008A;
--$13.5 Monongalia Health System Series 2008B;
--$57.5 Monongalia County Building Commission series 2005A.
The Rating Outlook is Stable.
The bonds are secured by a pledge of gross revenues and a mortgage pledge of the obligated group, which accounted for approximately 104% of system assets and 100% of system revenues in fiscal 2012. For purposes of this report, Fitch reports on the results of the consolidated system.
KEY RATING DRIVERS
STRONG FINANCIAL RESULTS AND COVERAGE: The affirmation of the 'A-' and Stable Outlook is based on Mon Health's strong financial performance over the last two fiscal years and through the seven-month period ended Jan. 31, 2013 (the interim period) with operating and operating EBITDA margins and maximum annual debt service coverage (MADS) exceeding Fitch's 'A' category medians.
SOLID MARKET POSITION: Mon Health has a solid market position of approximately 35%-36% in an area that has been only minimally affected by U.S. recessionary pressures.
STILL ELEVATED DEBT LOAD: Mon Health's leverage ratios, while still somewhat elevated with MADS at 3.7% of revenues and debt to capitalization at 53.5%, have been consistently improving. Having completed a major construction and renovation project, the organization is not planning to issue additional debt in the near term, which should further help to moderate Mon Health's debt load.
IMPROVED LIQUIDITY: The system's liquidity relative to expenses is solid with $118 million of unrestricted cash and investments, translating to 210 days cash on hand (DCOH) at the interim period, significantly higher than the category median. Cash to debt at 93% is somewhat lower than the category median, but is vastly improved from the 55% level four years ago.
MODERATION OF DEBT LOAD: Continued strong operating performance and a further moderation of the debt load over the next couple of years would likely lead to positive rating pressure.
The affirmation of the 'A-' rating is supported by the continuation of solid operating performance, exceeding Fitch's 'A' category medians, which has been maintained through the seven-month interim period, strong coverage of debt service and stable market share. Following the December 2009 completion of a major project, which included the construction of a new patient tower and renovation of certain inpatient areas, resulting in an all-private-room bed complement, the organization faces modest capital needs. This should result in moderation of the debt load, which is the only area where metrics are below the 'A' category medians.
Mon Health ended the last two fiscal years with very strong operating results. Fiscal 2012 (year end June 30) ended with operating income of $14 million, for an operating margin of 6.2% and operating EBITDA margin of 14.9%. For fiscal 2011 Mon Health reported operating income of $11.6 million, equal to operating margin of 5.4% and operating EBITDA margin of 14.6%. Both the operating and the operating EBITDA margins compare favorably to Fitch's 'A' category medians of 2.8% and 9.8%, respectively. Strong operating performance has been due to good revenue growth and capture of cardiac cases in the service area. Through the seven-month interim period ended Jan. 31, 2013, operating performance was maintained, with operating income of $7.1 million, equal to an operating margin of 5.4% and operating EBITDA margin of 14%. The interim period operating income includes $2.3 million of meaningful use monies from the federal stimulus, which had been included in the budget. Based on the interim performance, it is likely that Mon Health will exceed its consolidated system 2013 operating budget of $11.2 million (4.9% operating margin).
Management reports that there have been no shifts in market share, which is estimated between 35%-36% of the primary service area. The main competitor in the service area is West Virginia University Hospitals (WVUH), which maintains a closed medical staff. In Monongalia County, the market share is roughly split between the two providers. While Mon Health's admissions fell by approximately 10% last year, a trend which continues through the interim period, cardio thoracic surgery volumes have been robust, reported to be the highest to date. Management reports that Mon Health performs higher volumes of high-end cardiac surgery than WVUH. Mon Health performed 234 open-heart surgeries through the interim period, exceeding budget, and expects to perform potentially 400 open-heart procedures this fiscal year based on the strong year-to-date volumes. Mon Health is in the process of launching a trans-aortic valve replacement program (TAVR), the only such program in the state, which is expected to further increase cardiac volumes. TAVR is a minimally invasive procedure intended for patients who could not tolerate the stress of open-heart surgery. Mon Health is building a hybrid operating room for advanced CT procedures ($2.7 million), which is part of its capital budget to be funded from cash flow.
Beginning in 2009, Mon Health's liquidity improved significantly. The $118 million of unrestricted cash and investments at Jan. 31, 2013 translates to 210 days cash on hand (DCOH) and 13.9x cushion ratio (based on MADS of $8.5 million), both comparable to the 'A' category medians of 191 DCOH and 16.3x cushion ratio. Cash to debt at 93%, though significantly improved from 55% in fiscal 2009, lags slightly behind the 'A' category median of 116.4%, but will likely improve as Mon Health has completed its major capital projects and should now be able to increase its liquidity based on its strong operating cash flow.
Fitch's main credit concern is the still slightly elevated debt burden and the continued need to make large contributions to a now frozen defined benefit pension plan, estimated at $8 million annually. The significant investment in the physical plant, as well as the $14.5 million bond issue in 2008 to fund a portion of the pension liabilities, resulted in an elevated debt burden, but the debt metrics are slowly moderating and the updated facility will require only modest capital investment over the near term. Coverage of MADS by EBITDA was a solid 4.5x in fiscal 2012 and is at 4.2x at the interim period, comparing well to the category median of 4.1x. MADS as percent of revenues, at 3.7% at the interim period, is still higher than the 'A' median of 2.8%, but is likely to moderate based on the absence of debt plans in the near to medium term.
In March 2012, Mon Health elected to convert the series 2008A and 2008B bonds to a bank-rate mode, which eliminated the need for the LOCs that had previously provided liquidity for the two series. The bonds were purchased by JPMorgan and the rate is at an indexed floating rate for an initial term of seven years. The bonds retain their original amortization and maturity. Total outstanding debt is approximately $127 million and the current debt structure is relatively conservative with 62% of debt in fixed-rate mode. Mon Health has three swaps outstanding with a notional par of $51.7 million and mark to market of negative $14.9 million at Dec. 31, 2012. There are no collateral posting requirements on the swaps.
The Stable Outlook reflects Fitch's expectation that Mon Health will be able to maintain its solid financial and operating profile, which will make it possible to continue to fund its pension liabilities and further moderate its debt load.
Monongalia Health System, headquartered in Morgantown, West Virginia, consists of a 189 staffed bed acute care hospital, Mon Elder Services (90 independent living units and 40 assisted living units), an ambulance company and a foundation, and is an owner/part owner of several entities, including a durable medical equipment company, a home health agency, a rehabilitation facility, and an ophthalmology surgery center. The consolidated system had revenues of $224 million in fiscal 2012. Mon Health covenants to disclose annual audited financial statements within 120 days of the end of its fiscal year and quarterly financial statements within 45 days of the end of the quarter (60 days after the end of the last quarter).
Additional information is available at 'www.fitchratings.com'. The ratings above were solicited by, or on behalf of, the issuer, and therefore, Fitch has been compensated for the provision of the ratings.
Applicable Criteria and Related Research:
--Nonprofit Hospitals and Health Systems Rating Criteria, July 23, 2012
--Revenue-Supported Rating Criteria, June 12, 2012
Applicable Criteria and Related Research
Nonprofit Hospitals and Health Systems Rating Criteria
Revenue-Supported Rating Criteria
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